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MEMO/10/503

Brussels, 19 October 2010

The EU budget review: Frequently Asked Questions

What is the Communication on the budget review?

With its Communication adopted on 19 October 2010 (IP/10/1351) the Commission kicks off the debate on the budget review. The document provides an analysis of how the EU budget operates. It identifies areas where, in the Commission's view, improvements could be made. It identifies broad lines for the future budget with a number of principles, ideas and options about what the EU budget should focus on in the future, how to improve the way in which it delivers results and how the financial resources of the EU could be reformed.

What is it not?

The Communication on the budget review is not a proposal for the next Multiannual Financial Framework (MFF) beyond 2013. It does not define the spending priorities nor the size of the budget or the share each policy receives therein. All these elements will be put on the table before 1 July 2011 in the legislative proposal for a regulation on the next Multiannual Financial Framework.

Why a budget review?

In December 2005, the European Council asked the European Commission to "undertake a full, wide ranging review covering all aspects of EU spending, including the Common Agricultural Policy, and of resources, including the United Kingdom rebate".

Originally, the budget review was scheduled for 2008, or 2009 at the latest. However, in 2009, the Council, the European Parliament and the European Commission agreed to postpone it until 2010 as the Lisbon Treaty was not yet ratified, a new economic strategy was not yet adopted and a new Commission was not yet in place.

How did the Commission prepare its Communication on the budget review?

The Commission gathered input from a wide audience. It conducted a public consultation that closed in June 2008. Member States, local and regional authorities, Members of the European Parliament, universities, NGOs and citizens expressed their views on the future of the EU budget. This was followed by a conference on the same issue in November 2008.

Over the last months, the College of Commissioners debated the budget review on numerous occasions and Commissioner Lewandowski listened to many representatives of Member States, EU institutions, towns and regions, small and medium enterprises and NGOs on the question of how to improve the way the EU budget works.

What are the lessons learned?

In the past, limited flexibility prevented the EU budget from responding swiftly to political imperatives and changing circumstances, for example to soaring food prices in developing countries in 2008, the tsunami, changing demands in major European projects such as Galileo and ITER or to the economic and financial crisis. Furthermore, the “juste retour” debate accompanying preparations for the current financial framework detracted attention away from the true added value and the quality of spending. Inconsistencies between programmes and high administrative burdens in programme implementation have proved to be obstacles to effectiveness. The assessment of inputs rather than performance dominated controls. The domination of the grants approach may have limited the budget’s potential impact and hindered the attraction of other public and private investment at a larger scale.

What are the principles the Commission wants to debate?

For the Commission, the issue is not first and foremost about spending more or less, but about finding ways to spend more intelligently. To achieve this, the Commission wants to look at the next budget on the basis of 5 principles:

  • -a focus on policy priorities;

  • -a focus on added value;

  • -a focus on results;

  • -solidarity in delivering mutual benefits, and

  • a reform of the financing of the budget.

On this basis, the Commission wants to consult the Member States and the European Parliament before putting forward legislative proposals for the next financial framework beyond 2013.

Which key policy priorities should the EU budget support?

Together with law-making and with policy coordination, the budget is a crucial tool for delivering on the EU's policy priorities. As such, the level of spending should reflect the EU's core policy priorities as spelled out in the Treaty of Lisbon and in the Europe 2020 Strategy. This means that the budget should above all be designed to help deliver smart, sustainable and inclusive growth. It also means directing it towards collective challenges like energy and climate change, justice and home affairs and the external projection of the EU.

How could the EU budget support key policy priorities?

To boost smart, sustainable and inclusive growth, efforts need to be concentrated where they can be most effective and where action can have an early impact on growth. A non-exhaustive set of examples is listed hereafter, linked to each key policy priority.

Smart growth: Research and innovation are engines of economic and productivity growth. The current EU programmes for research and innovation offer a high societal pay-off and European added value. Furthermore, this area has a strong potential to attract other public and private spending, leveraged by the EU budget. The Risk-sharing Finance Facility (RSFF) is a good demonstration of how private investment could successfully be leveraged for innovation. With EUR 1 billion from the EU budget, the EU was able to bring an additional EUR 16.2 billion to support R&D. Furthermore, to achieve the European infrastructure of the future in the areas of transport, communication and energy networks, the EU must combine the right regulatory framework with innovative financing (for example EU project bonds) and the pooling of European and national resources.

Sustainable growth: Action geared towards reaching the climate and energy targets of the Europe 2020 strategy has some of the greatest potential for future jobs. The future EU budget could lend its support either through specific budget headings or by mainstreaming climate and energy targets into other policy areas. The reformed Common Agricultural Policy makes a contribution to a wide variety of EU objectives, from cohesion, climate change and biodiversity to health, competitiveness and food security. CAP will need to be reformed further. The issue is what degree of intensity that reform should envisage. Options range from ironing out some discrepancies, such as more equity in the distribution of direct payments between Member States and farmers, or major overhauls to ensure that it becomes more sustainable and reshaping the balance between different policy objectives; or even a more radical reform moving CAP away from income support and most market measures and giving priority to environmental and climate change objectives. Continuing the trend of reform would still leave agriculture representing a major public investment – one falling on the EU’s shoulders, rather than on national budgets.

Inclusive growth: Cohesion policy can make a real contribution to growth if coupled with Europe 2020 and macroeconomic stability. It would continue to help the poorer regions, but at the same time it would also be an important engine of growth for the whole of the EU. Today, EU resources should be focused on the poorest regions and Member States, but cohesion policy support is also important for the rest of the Union – to tackle issues like social exclusion or environmental degradation, to support economic restructuring and the shift to a more innovative and knowledge based economy, and to create jobs and improve skills. To achieve this, a clear focus on added value, a concentration on results and a strategic framework outlining a comprehensive investment strategy are needed. This framework would replace the current approach of separate sets of strategic guidelines for policies and would ensure greater coordination between them. Another area where the Commission wants to make further progress is in improving the quality of expenditure. Firstly, the Commission wants to further build up the institutional and administrative capacity in the member states. Secondly, some form of qualitative competition among national/regional programmes for cohesion funding could be introduced by establishing a performance reserve to which all Member States and regions could apply, with payments being made based on the quality of the programmes presented. The European Social Fund could be refocused on securing the 2020 objectives. A comprehensive European employment initiative could improve skills, mobility, adaptability and participation in society through joint initiatives in the area of education, employment and integration. The goal of ensuring social inclusion and the rights of minorities such as the Roma and migrants would also be given attention, linked to the EU’s approach to migration as a whole. The European Globalisation Adjustment Fund could be extended and be put on a permanent footing to help cushion the impact of certain major disruptions to member state labour markets. Its functioning would need to be simplified to become more reactive to changes in economic circumstances.

Citizenship: The fact that the Union serves its citizens and promotes EU citizenship is shown in many programmes, including in the EU Solidarity Fund, which has granted more than EUR 2.1 billion since 2002 to support Member States and regions hit by major natural disasters. The Commission wants to make it work better both in terms of the speed of aid and in terms of scope, which does not currently cover all kinds of major disasters. Another example where the EU budget intervenes in the interest of the entire EU is the support to effective border management, to the exchange of information to apply justice effectively, or to the implementation of policies on asylum and migration. Burden sharing, supporting national administrations and pooling of resources are cost-effective ways of ensuring effective delivery of citizenship policies.

Global Europe: The Commission believes that Europe can achieve more in the external arena if we pool our resources and improve coordination. It is a question of economies of scale. A good example of this is development cooperation. Donor coordination has made progress in pooling resources, but the problem of the fragmentation of aid remains. Tackling these weaknesses would bring substantial efficiency gains for Member States (estimated at up to EUR 6 billion a year). While we can further pool resources in some areas, we also need to recognise that others areas simply need more funding. Another example is humanitarian aid where the EU is one of the most high-profile and effective suppliers of emergency assistance. Yet the fact that the humanitarian aid budget has had to access the Emergency Aid Reserve every year since 2007 points to a weakness that needs to be addressed.

How does the Commission want to look at added value?

A key question for the future budget will be whether spending at the EU level means a better deal for citizens than spending at the national level. The European dimension can maximise the efficiency of Member States’ finances and help to reduce total expenditure, by pooling common services and resources to benefit from economies of scale. As a consequence, the EU budget should be used to finance actions that Member States and regions cannot finance themselves, and where it can secure better results.

The EU budget can also plug gaps left by the dynamics of national policy-making, most obviously by addressing cross-border challenges in areas like infrastructure, mobility or EU research cooperation – gaps which would otherwise damage the interest of the EU as a whole. It can open the door to leveraging a much wider range of public and private resources than is available at the national level alone.

In times of severe and long-term budgetary constraints, coordination between the EU and national budgets should be seen as crucial for the sake of improving economic governance, and the transparency and efficiency of public spending.

What does a result-driven budget imply?

The EU budget can be a powerful agent for reform. But spending on the right policies only makes real sense if it secures the desired results on the ground and has a real impact. Therefore, the measurement of impacts needs to be given priority over inputs. What's more, the right balance has to be found between predictability and flexibility, and between conditionality and payment on the basis of results. As is the case with cohesion policy, all other areas of spending could be subject to the definition of a specific set of targets on which the disbursement of funds would depend. Other approaches include setting aside an EU-wide reserve in most programmes, or modulating co-financing rates to performance. Equally, the right balance between simplification and the controls necessary to ensure sound financial management has to be struck. The budget would increasingly be used to leverage other public and private investment to support strategic investments with the highest European added value. When looking at the option of loan guarantees as one of the options for innovative financial instruments the implications of leveraging the EU budget need to be carefully analysed in order to respect the own resources ceiling, notably in the light of existing guarantee schemes like the Balance of payments facility and the European Financial Stabilisation Mechanism. A more general use of the EU budget as an instrument to guarantee loans and bonds would require a fresh look at the mechanism determining the capacity to underwrite such guarantees. EU project bonds could be designed to secure investment for key strategic interests for the EU and give sufficient confidence to allow major investment projects to attract the support they need. The size of the infrastructure challenge is such that the EU needs to help to unlock private finance. For large-scale projects of major strategic importance (such as Galileo, ITER, and GMES) and with long-term commercial potential, an alternative approach would be to set up a support structure as a separate entity, to which the EU budget would make a stable contribution in the form of a fixed annual contribution, with no assumption that the EU should make up any shortfalls.

Economic governance – will there be a link to the EU budget?

Linking the EU budget to reinforced economic governance is indeed the intention of the Commission. The latter will take these issues forward in the context of the debate on economic governance following the October European Council.

How does solidarity generate mutual benefits?

Solidarity will remain one of the cornerstones of the European Union, a core principle and a source of strength. The budget is an indispensable way to express this solidarity – but it is not the only one.

The driver behind Europe's growth and jobs is the single market. Making the weaker parts of the Union stronger so that stability is generated and the single market enhanced, creates benefits for all. GDP in the EU-25 as a whole is estimated to have been 0.7% higher in 2009 because of cohesion policy over the 2000-2006 period – meaning a good return for spending accounting for 0.4% of EU GDP over the same period (this includes both EU budget and national co-financing).

Likewise, there are interventions which are geographically concentrated but which deliver collective benefits. An example: protecting the external borders against illegal immigration. The burden should not only fall on Member States with external borders, because the absence of proper action would have a negative impact on all. The same is true in areas such as environment, climate change, etc.

How shall the financing of the budget be reformed?

From the beginning of the 1970s, the EU collected own resources deriving from common policies like the common customs tariff duties. The autonomy of these own resources has been gradually undermined and the current system of EU financing has evolved piecemeal into a confusing and opaque mix of contributions from national budgets, corrections and rebates. The connection between the original own resources and common EU policies has been lost, making the system less transparent and increasing doubts about fairness. Therefore, a fresh look is essential to re-align EU financing with the principles of autonomy, transparency and fairness.

Almost two thirds of the EU budget today is financed from contributions by the Member States, despite the Treaties having already established the principle of own resources in 1957. The Commission does not believe that the current mix is appropriate and suggests a number of options for the generation of own resources to reduce the share of contributions by Member States. This can have welcome effects on the national budgets facing consolidation constraints.

To this end, the Commission enumerates, in a non-exhaustive list, the following options for own resources that could be discussed: taxation of the financial sector, EU revenues from auctioning under the Emissions Trading System, a EU charge related to air transport, a EU value added tax, a EU energy tax and a EU corporate income tax. In a technical annex to the Communication, the advantages and disadvantages of each are listed. Most importantly, the future blend of own resources would be a replacement not an addition to the financing of the budget.

As for correction mechanisms, it is ultimately the composition of the expenditure and the reforms of the own resources system that will determine whether correction mechanisms are justified in the future.

What does the annex to the EU Budget Review Communication contain?

Among other things, this staff working document summarises the outcome of the public consultation on the budget review, analyses the evolution of expenditure and describes the evolution of the own resources and of the correction mechanisms. It also assesses the extent to which the current financial framework 2007-2013 is flexible and sets out how the strengthened Stability and Growth Pact is devised such that it facilitates the eventual move to a system of enforcement linked to the EU budget. The annex also summarises the relevance and effectiveness of different policy areas and gives a typology of EU financial instruments. Furthermore, it sets out possibilities as to how to simplify the financial management of EU programmes. Finally, it contains an analysis of the advantages and disadvantages of different potential own resources.

Does the Commission pursue savings in the area of administrative expenditure?

Yes. Part of a credible European budget is the rigorous pursuit of savings, boosting efficiency and eliminating pockets of inefficiency in administrative resources, which comprise salaries, pensions, IT and buildings as well as the costs of working in 23 languages. Rationalisation and the common use of procedures, tools and resources could for example limit the costs of action by the institutions and the agencies of the EU. The administrative burden in implementing spending programmes should also be considered. Regarding staff numbers, since 2007 the Commission has a policy of zero growth for staff.

Will the size of the budget change after 2013?

The Budget Review is not about the size of the EU budget. There should first be a debate on the budget review and an agreement on principles before the Commission tables the draft regulation for the Multiannual Financial Framework in the second quarter of 2011, before 1 July 2011. Only at this time, will the Commission come forward with proposals on the size of the future budget and the share for the different policies within it. The debate on the budget review will gainfully inform these future proposals.

Today, EU spending amounts to EUR 122.9 billion for 2010. This is relatively small in comparison to national budgets – some 1% of EU GDP, compared to overall public spending which averages between 45 and 50% of EU GDP across the EU.

In a European Union with 500 million citizens, the size of the budget represents good value for money for citizens: for 246 EUR a year, citizens can be sure that they can live in peace, security, democracy, a state of law, based on the respect of fundamental rights, a social market economy, with a social model unrivalled in other parts of the world, and benefits such as easy travelling, studying and living abroad, and a single market that brings down prices and works for the consumer.

What are the EU's own resources?

The Rome Treaty (1957) stated that the European Union should have its 'own resources' to finance its expenditure. However, until 1970, the entire budget was funded by national contributions. In April 1970 the Council decided that own resources should cover all expenditures, with member states' contributions to top up if needed.

Today, there is a de facto mix of contributions by the Member States and own resources:

  • National contributions based on a country's GNI (76% of total revenue)

  • Import duties (12% of total revenue)

  • A levy on national VAT receipts (11% of total revenue).

Will my country be a net contributor in the future?

It is too early to determine the individual Member States' contributions. We first need to have a responsible discussion about all aspects of the spending and revenue side of the budget and agree the principles governing the future budget. Only then will the Commission table the legal proposals for the Multiannual Financial Framework, including the overall size of the future budget, the share of the different policies and the right mix of resources to finance the future budget. To start a phantom debate on net contributions now, would be based on pure speculations and not help any serious discussion about the future budget.

What is the UK rebate?

Introduced at the European Council in 1984 the UK rebate was justified by two factors: the United Kingdom receives very little from the Community's spending on agriculture, as it has a small farming sector, and the UK pays a contribution the Community budget regarded as too high in relation to its prosperity in the 1980s.

The rebate in any given year is equivalent to 66% of the UK's net contribution in the previous year; other Member States' contributions are increased to compensate.

Its amounts fluctuated between EUR 4.6 billion and 5.7 bn a year over the period 1997- 2005. The UK national contribution was around 9 bn euros in those years.

In December 2005, the British Prime Minister Tony Blair agreed to reduce the British rebate by £1bn a year between 2007 and 2013. The UK national contribution stood at around 7 bn euros.

The proportion of the UK contribution to the financing of the EU budget remains stable at around 10%, in fourth position after Germany, France and Italy.

At the same time, EU payments to the UK are expected to increase in 2011.

Other factors have some influence as well, like the exchange rate GBP – EURO.

Is the UK the only country with a rebate?

No. There are other countries that have corrections. Altogether, there are the following types of budgetary corrections:

  • the UK correction in favour of the UK, essentially consisting of the reimbursement of 66% of the difference between UK GNI- and VAT-contributions to the budget and its receipts;

  • the reduced financing of the UK correction to one fourth of their normal share for Germany, Austria, the Netherlands and Sweden,

  • lump-sum payments to the Netherlands and Sweden,

  • reduced VAT call-rates for the Netherlands, Sweden, Germany and Austria,

All these corrections provided for in the current Own Resources Decision of June 2007 will automatically expire in 2013, with the exception of the UK rebate.

Will the Commission touch on the Common Agricultural Policy and Cohesion Policy?

As of yet the budget review is not about the size of the future budget and the share of the different policies within it. This said, both agriculture and cohesion spending have benefited from major reform in the past and we will look at them in a fresh light. The more these policies are shown to bring real benefits to the whole of the Union – fitting the Europe 2020 agenda, in areas like competitiveness, networks, and tackling climate change – the more obvious it will be that they deliver on the key policy priorities of the EU as a whole.

What comes next?

The Commission has done the job it was requested to do and has completed a full, wide range review of the EU budget. It is now for the Council and the European Parliament to decide how to take it further. There is no deadline for the Council to adopt its position on the budget review. Its position must adopted by qualified majority. As required by the 2005 Council meeting and the 2006 Interinstitutional Agreement on budgetary discipline and sound financial management, the Council "can take decisions on all the subjects covered by the review. The European Parliament will be part of any formal follow-up steps". The Commission will table the draft regulation for the future Multiannual Financial Framework in the second quarter of 2011 and before 1 July 2011.

Chronology

The origin of the budget review is the December 2005 European Council (followed by the 2006 inter-institutional agreement on budget) when the Commission was asked to review all aspects of EU spending and sources of income.

In 2007-2008 a public consultation is carried out.

2009: the EP, Council and Commission agree to postpone budget review for a number of reasons, for example that it is not for an outgoing Commission to proceed and that the budget review should incorporate the future Commission's political programme. And at the time it was not yet sure whether the Lisbon Treaty would be ratified by all.

Several orientation debates in the Commission take place between May and October 2010.

Adoption of the Communication of the budget review on Tuesday 19 October 2010 by the Commission.

The Commission will adopt its legislative proposal on the future Multiannual Financial Framework in the second quarter of 2011 and before 1 July 2011.

2012: expected agreement by the European Council on the MFF and subsequent assent by the European Parliament.

Final adoption of the individual legislative acts for the different policy areas in 2012-2013.

January 2014: Entry into force of the Multiannual Financial Framework whose length is yet to be determined. The Commission has suggested a 5+5 period including a mid-term review.


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